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Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?

  • Jozef Barunik
  • Evzen Kocenda
  • Lukas Vacha

Asymmetries in volatility spillovers are highly relevant to risk valuation and portfolio diversification strategies in financial markets. Yet, the large literature studying information transmission mechanisms ignores the fact that bad and good volatility may spill over at different magnitudes. This paper fills this gap with two contributions. One, we suggest how to quantify asymmetries in volatility spillovers due to bad and good volatility. Two, using high frequency data covering most liquid U.S. stocks in seven sectors, we provide ample evidence of the asymmetric connectedness of stocks. We universally reject the hypothesis of symmetric connectedness at the disaggregate level but in contrast, we document the symmetric transmission of information in an aggregated portfolio. We show that bad and good volatility is transmitted at different magnitudes in different sectors, and the asymmetries sizably change over time. While negative spillovers are often of substantial magnitudes, they do not strictly dominate positive spillovers. We find that the overall intra-market connectedness of U.S. stocks increased substantially with the increased uncertainty of stock market participants during the financial crisis.

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File URL: http://arxiv.org/pdf/1308.1221
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Paper provided by arXiv.org in its series Papers with number 1308.1221.

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Date of creation: Aug 2013
Date of revision: Jul 2014
Handle: RePEc:arx:papers:1308.1221
Contact details of provider: Web page: http://arxiv.org/

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  1. Bubák, Vít & Kocenda, Evzen & Zikes, Filip, 2011. "Volatility transmission in emerging European foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2829-2841, November.
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  7. Ippei Fujiwara & Koji Takahashi, 2011. "Asian Financial Linkage: Macro-Finance Dissonance," Bank of Japan Working Paper Series 11-E-6, Bank of Japan.
  8. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  9. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  10. Ederington, Louis H. & Guan, Wei, 2010. "How asymmetric is U.S. stock market volatility?," Journal of Financial Markets, Elsevier, vol. 13(2), pages 225-248, May.
  11. Bruno Feunou & Mohammad R. Jahan-Parvar & Roméo Tédongap, 2013. "Modeling Market Downside Volatility," Review of Finance, European Finance Association, vol. 17(1), pages 443-481.
  12. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
  13. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
  14. Garman, Mark B & Klass, Michael J, 1980. "On the Estimation of Security Price Volatilities from Historical Data," The Journal of Business, University of Chicago Press, vol. 53(1), pages 67-78, January.
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